Colorado’s Public Employee Retirement Association (PERA) is in a financial crisis.
During the past year the market value of PERA’s portfolio fell 27.2 percent or $11.3 billion, from $41.4 billion to $30.1 billion. At the beginning of the year, PERA’s unfunded liabilities – the excess of the present value of assets over liabilities – was $12.3 billion. With the decrease in the value of assets, the unfunded liabilities have almost doubled to nearly $24 billion.
Another measure of the magnitude of the crisis is the funding ratio, which is the ratio of the present value of assets to liabilities in the fund. At the beginning of the year the funding ratio was 78 percent; at the end of the year it was 57 percent.
The Joint Budget Committee staff concludes that “the current schedule of amortization is outside of statutorily established guidelines.” It is also outside of guidelines set by the Government Accounting Standards Board.
Because PERA is a public pension system, it is ultimately the responsibility of Colorado taxpayers. Make no mistake, it is taxpayers who must make up the difference between assets and liabilities in PERA. Now, taxpayers are on the hook for $20 billion in unfunded liabilities, and they will have to pay for any future unfunded liabilities incurred in the system.
PERA’s doesn’t graps the urgency of the situation saying that “immediate action is premature.” It is clear that PERA will not declare an actuarial emergency no matter how bad the funding ratio deteriorates. The Colorado state legislature could declare an actuarial emergency, which would establish the legal basis for fundamental reform of PERA.
In the past, the legislature attempted to address the problem of unfunded liabilities. Each time it entered into a compromise with PERA. The result has been legislation that applies a band-aid solution without addressing the fundamental problem.
Colorado citizens cannot do much about the funding crisis that already exists in PERA, but we can stop the bleeding. PERA must accept fundamental reforms that replace the defined benefit plan with a defined contribution plan.
It would be relatively simple to switch PERA from a defined benefit plan to a defined contribution plan. In fact most private pension systems and a growing number of public pension systems already have done so. New employees are required to sign up for the defined contribution plan. Current employees are given the option of signing up for the defined contribution plan or sticking with the defined benefit plan. For those who make the switch, all past contributions to the defined benefit plan are transferred to the defined contribution plan. Current retirees continue to receive the benefits they have accrued in the defined benefit plan.
With a defined contribution plan over time, as older workers retire and newer workers acquire ownership in assets in their individual retirement plans, the pension system becomes less dependent on the pool of assets held by the pension fund. In other states where this reform has been enacted, such as Michigan, the costs of the pension plan have been reduced, and progress has been made in reducing unfunded liabilities.
If this switch to a defined contribution plan is so simple, why hasn’t it happened? Those who have made decisions creating the funding crisis have not been held accountable for those decisions: this includes PERA Board members, public employee union negotiators, and elected officials responsible for overseeing the state pension system.
Colorado citizens no longer can afford a state pension system dominated by special interests. Reforming PERA will require grassroots support from citizens who understand the funding crisis and who are willing to work to reform the state pension system. It also will require courageous politicians willing to stand up to the special interests in PERA, and begin to protect taxpayers.
Reforming PERA is a formidable task, but one that is both doable and worth doing.
Barry Poulson is a Senior Fellow with the Independence Institute Senior Fellow, a member of Treasurer’s Commission to Strengthen and Secure PERA, and a Distinguished Scholar for Americans for Prosperity.